Fed signals it could increase or decrease stimulus

Published: Wednesday, May 1, 2013 1:31 p.m. CDT

By MARTIN CRUTSINGER - AP Economics Writer

WASHINGTON – The Federal Reserve on Wednesday stood by its extraordinary efforts to stimulate the economy. And it signaled that it could increase or decrease the pace of bond purchases depending on how the job market and inflation perform.

After concluding a two-day policy meeting, the Fed said in a statement that the job market has shown some improvement in recent months, on balance. But it also notes that unemployment remains high and government budget policies have begun to restrain economic growth.

The Fed maintained its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent from its current 7.6 percent.

And it said that it will continue to buy $85 billion a month in Treasury bonds and mortgage-backed securities. The bond purchases are intended to keep long-term borrowing costs down and encourage more borrowing and spending.

The statement was nearly identical to the one issued after the Fed's March meeting. The one notable change was the Fed signaling it could change its pace of bond purchases.

"The committee is prepared to increase or reduce the pace of its (bond) purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes," the statement said.

The Fed action was support on an 11-1 vote. Esther George, president of the Kansas City regional Federal Reserve bank, dissented for the third straight meeting. The statement said that George remained concern that the continued high level of policy accommodation increased the risks of future economic and financial imbalances.

Debate among Fed policymakers at the March meeting had prompted some economists to speculate that the Fed might scale back its bond purchases in the second half of 2013 if job growth accelerated.

But several reports in recent weeks have signaled the economy has weakened since the start of the year. Employers added only 88,000 jobs in March, far fewer than the 220,000 averaged in the previous four months. And the economy grew at an annual rate of 2.5 percent in the January-March quarter — a decent growth rate but one that's expected to weaken in coming months because of federal spending cuts and higher Social Security taxes.

At the same time, consumer inflation as measured by the gauge the Fed most closely monitors remains well below its 2 percent target. That gauge rose just 1 percent in the 12 months that ended in March.

Many analysts now think the Fed will keep the Fed's easy-credit policies unchanged, possibly for the rest of the year.

The Fed has been joined by other major central banks in seeking to strengthen growth and reduce high unemployment.

The European Central Bank could cut its benchmark lending rate from a record low of 0.75 as soon as Thursday because the euro area's economy remains stagnant.

Unemployment for the eurozone is 12.1 percent. And the ECB predicts that the euro economy will shrink 0.5 percent in 2013.

Japan's central bank has acted to flood its financial system with more money to try to raise consumer prices, encourage borrowing and help pull the world's third-largest economy out of a prolonged slump. Economists say Japanese consumers will spend more if they know prices are going to rise.

The Bank of Japan has kept its benchmark rate between 0 and 0.1 percent to try to stimulate borrowing and spending.

The Fed's goal is to keep price changes from hurting the economy. This could occur if inflation raged out of control or if the opposite problem – deflation – emerged. Deflation is a prolonged drop in wages, prices and the value of assets like stocks and houses.

The United States last suffered serious deflation during the Great Depression of the 1930s but Fed policymakers worry more about the threat of deflation any time prices go lower than 2 percent.